MCM2C06

MCM2C06 : ADVANCED CORPORATE ACCOUNTING
ADVANCED CORPORATE
ACCOUNTING
(MCM2C06)
STUDY MATERIAL
II SEMESTER
CORE COURSE
M.Com.
(2019 Admission onwards)
UNIVERSITY OF CALICUT
SCHOOL OF DISTANCE EDUCATION
CALICUT UNIVERSITY P.O.
MALAPPURAM - 673 635, KERALA
190606
School of Distance Education
University of Calicut
STUDY MATERIAL
SECOND SEMESTER
M.Com.
(2019 Admission onwards)
CORE COURSE:
Prepared by:
Dr. AFEEFA CHOLASSERI
Assistant Professors OF Commerce (On Contract)
School of Distance Education
University of Calicut
Scrutinized by:
Dr. B. JOHNSON
Professor
Department of Commerce & Management Studies
University of Calicut.
Disclaimer
"The author(s) shall be solely responsible
for the content and views expressed in this
book"
CONTENT
Page No.
MODULE 1
Group Financial Statements 1 - 16
MODULE 2
Accounting for Corporate Restructuring 17 - 63
MODULE 3
Accounting for Taxation 64 - 71
MODULE 4
Accounting for Revenue and Leases 72 - 85
MODULE 5
Modern Concepts in Accounting 86 - 101
MODULE I
GROUP FINANCIAL STATEMENTS
Group financial statements are financial statements

that include the financial information for more than one
component. A component is an entity or business activity
for which financial information is separately prepared, and
which is included in the group financial statements. A
component is most commonly a subsidiary, but it may also
be a function, process, product, service, or geographical
location, or even an investment accounted for under the
equity method.
Group Accounts are the financial statements of a group
of companies. These are usually presented in the form of
consolidated accounts.They are an example of the 'substance
over form' principle in financial reporting. Some large
businesses are organised as a single company. If group
accounts are not prepared, it would be very difficult to make
appropriate comparisons. The purpose of group accounts is to
report the results and financial position of the businesses in a
way that makes them readily comparable, even though they
have different legal structures.
Group Structures: arrangement, and articulation of the
members of that group. The group’s formation is its overall
“design” or “architecture,” meaning its general configuration
for unifying the constituent elements into a single unit-the
School of Distance Education, University of Calicut 1

group’s basic shape. The structure is the underlying pattern of

stable relationships among the group members
IFRS 10/ Ind AS 110
IFRS 10 establishes principles for presenting and
preparing consolidated financial statements when an entity
controls one or more other entities.The primary goal behind
this standard is to come up with a single model for control
which could be applied to all entities. In other words, IFRS 10
is required in order to have control over an investee by an
investor, it must have all three of the following: 1) Power over
the investee; 2) Exposure or rights to variable returns from its
involvement with the investee; and 3) The ability to use its
power over the investee to affect the amount of the investor’s
returns. IFRS 10 provides guidance on applying this new
control model with a view to addressing some of the more
complex areas that led to diversity in the past. This includes:
when holding a significant but less than a majority of voting
rights can give power (i.e. “de facto power”), when potential
voting rights should be considered in the assessment of
control, what factors should be considered in assessing control
for entities not controlled by voting rights (i.e. special purpose
entities or structured entities), when an entity is acting as an
agent on behalf of others and how this impacts the assessment
of control.
In simple, Ind AS 110 establishes principles for the
presentation and preparation of consolidated financial
statements when an entity controls one or more other entities.
The standard defines the principles of control and how to apply

the same and explains the accounting requirements for

preparing consolidated financial statements.
CONSOLIDATED FINANCIAL STATEMENT
Consolidated financial statements: [IFRS 10:B86]
 combine like items of assets, liabilities, equity, income,
expenses and cash flows of the parent with those of its
subsidiaries
 offset (eliminate) the carrying amount of the parent's
investment in each subsidiary and the parent's portion
of equity of each subsidiary
 eliminate in full intragroup assets and liabilities, equity,
income, expenses and cash flows relating to
transactions between entities of the group (profits or
losses resulting from intragroup transactions that are
recognized in assets, such as inventory and fixed assets,
are eliminated in full).
A reporting entity includes the income and expenses of
a subsidiary in the consolidated financial statements from the
date it gains control until the date when the reporting entity
ceases to control the subsidiary. Income and expenses of the
subsidiary are based on the amounts of the assets and liabilities
recognized in the consolidated financial statements at the
acquisition date.
The parent and subsidiaries are required to have the
same reporting dates, or consolidation based on additional
financial information prepared by subsidiary, unless
impracticable. Where impracticable, the most recent financial
statements of the subsidiary are used, adjusted for the effects

of significant transactions or events between the reporting
dates of the subsidiary and consolidated financial statements.
The difference between the date of the subsidiary's financial
statements and that of the consolidated financial statements
shall be no more than three months.
Non-controlling interests (NCI)
 A parent shall present non-controlling interests in the
consolidated balance sheet within equity, separately
from the equity of the owners of the parent.
 Changes in a parent’s ownership interest in a subsidiary
that do not result in the parent losing control of the
subsidiary are equity transactions (i.e. transactions with
owners in their capacity as owners).
Non-controlling interest is the equity in a subsidiary not
attributable, directly or indirectly, to a parent. For example,
when an investor acquires 100% share in a company, then
there’s no non-controlling interest, because the investor owns
subsidiary’s equity in full. However, when an investor acquires
less than 100%, let’s say 80%, then there’s non-controlling
interest of 20%, as the 20% of subsidiary’s net assets belong to
someone else.
IFRS 3 permits 2 methods of measuring non-
controlling interest:
1. Fair value, or
2. The proportionate share in the recognized acquiree’s
net assets.

Selection of method for measuring non-controlling

interest directly impacts the amount of goodwill recognized.
If a parent loses control of a subsidiary, the parent:
(a) Derecognizes the assets and liabilities of the former
subsidiary from the consolidated balance sheet.
(b) Recognizes any investment retained in the former
subsidiary at its fair value when control is lost and
subsequently accounts for it and for any amounts owed by or
to the former subsidiary in accordance with relevant Ind AS.
That fair value shall be regarded as the fair value on initial
recognition of a financial asset in accordance with Ind AS 39
or, when appropriate, the cost on initial recognition of an
investment in an associate or joint venture.
(c) Recognizes the gain or loss associated with the loss of
control attributable to the former controlling interest.
IFRS 3/ Ind AS 103 states that financial reporting for
Business Combinations should be done as per purchase
method of accounting. Under purchase method of accounting,
the acquirer identifiable assets and liabilities should be
measured at their fair value on the acquisition date, a method
that requires significantly more effort than pooling of interests
method and will usually result in the recognition of goodwill
or negative goodwill on acquisition.
Ind AS 103 “Business Combinations” deals with the
accounting for business combinations in standalone as well as
consolidated financial statements. A set of assets acquired and
liabilities assumed are typically regarded as a business if they

can together run independently as a going concern (i.e. it

consists of inputs and processes applied to those inputs, which
has the ability to create an output). If they do not constitute
business, the same shall be accounted as an asset acquisition.
Ind AS 103 specifically provides for fair valuation of assets,
liabilities and even non-controlling interest, which was earlier
described as minority interest and valued at the amount of
equity attributable to minority shareholders. One exception to
such valuation is Common Control Business Combinations
where the items are recorded at their carrying value.
Consolidated financial statements: [IFRS 10:B86]
GOODWILL VALUATION (IFRS 3/ Ind AS 103)
Goodwill is an asset representing the future economic
benefits arising from other assets acquired in a business
combination that are not individually identified and separately
recognized.
The acquirer shall recognize goodwill as of the
acquisition date measured as the excess of (a) over (b) below:
(a) the aggregate of:
(i) the consideration transferred measured in accordance with
this Indian Accounting Standard, which generally requires
acquisition-date fair value
(ii) the amount of any non-controlling interest in the acquiree
measured in accordance with this Indian Accounting
Standard; and

(iii) in a business combination achieved in stages, the

acquisition-date fair value of the acquirer’s previously
held equity interest in the acquiree.
(b) the net of the acquisition-date amounts of the identifiable
assets acquired and the liabilities assumed measured in
accordance with this Indian Accounting Standard. In a
business combination in which the acquirer and the acquiree
(or its former owners) exchange only equity interests, the
acquisition-date fair value of the acquiree’s equity interests
may be more reliably measurable than the acquisition date fair
value of the acquirer’s equity interests. If so, the acquirer shall
determine the amount of goodwill by using the acquisition-
date fair value of the acquiree’s equity interests instead of the
acquisition-date fair value of the equity interests transferred.
To determine the amount of goodwill in a business
combination in which no consideration is transferred, the
acquirer shall use the acquisition-date fair value of the
acquirer’s interest in the acquiree determined using a valuation
technique in place of the acquisition-date fair value of the
consideration transferred.
The objective of IFRS 3 Business Combinations is to
improve the relevance, reliability and comparability of the
information that a reporting entity provides in its financial
statements about a business combination and its effects.
More specifically, IFRS 3 establishes principles and
requirements for how the acquirer:

• Recognizes and measures the identifiable assets

acquired, the liabilities assumed and any non-
controlling interest in the acquiree;
• Recognizes and measures the goodwill acquired in the
business combination, or a gain from a bargain
purchase;
• Determines what information to disclose about the
business combination.
What is the difference between IFRS 3 and IFRS 10?
Although it may seem that the IFRS 10 Consolidated
Financial Statements and IFRS 3 Business Combinations deal
with the same thing, that’s not the whole truth. Both standards
deal with business combinations and their financial statements.
But while IFRS 10 defines a control and prescribes specific
consolidation procedures, IFRS 3 is more about the
measurement of the items in the consolidated financial
statements, such as goodwill, non-controlling interest, etc. It
seeks to enhance the relevance, reliability and comparability of
information provided about business combinations (e.g.
acquisitions and mergers) and their effects. It sets out the
principles on the recognition and measurement of acquired
assets and liabilities, the determination of goodwill and the
necessary disclosures.
INTRA – GROUP TRANSACTIONS
Intra-group transactions are transactions between
entities within a group of entities and that group is
consolidated into one set of Consolidated Financial

Statements. Intra-group transactions are not with third parties

outside the scope of consolidation (this means the group of
companies consolidated to one unit). In the Consolidated
Financial Statements only balances and transactions remain
with third parties outside the scope of consolidation.
In the consolidation process all company financial
statements of each reporting entity in the scope of
consolidation are first combined into a sub-consolidation, then
all intra-group transactions are eliminated, sometimes leaving
a small (not material) mismatch. Material mismatches have to
be investigated and corrected in close collaboration with the
two entities involved. Also Intra-company transactions
(transactions with related companies outside the scope of
consolidation) may be netted, showing only the remaining
receivable or payable with that related company.
Any profits resulting from intra group transactions are
eliminated from the consolidated accounts. (For example this
would include fixed assets, stocks, investments etc. transferred
within the group). Any profits resulting from intra group
transactions are eliminated from the consolidated accounts.
(For example this would include fixed assets, stocks,
investments etc. transferred within the group). The
consolidated financial statements are the statements of the
group, i.e. an economic entity consisting of a parent and its
subsidiaries. These consolidated financial statements then can
only contain revenues, expenses, profits, assets and liabilities
that relate to parties external to the group. Adjustments must
be made for intragroup transactions as these are internal to the

economic entity, and do not reflect the effects of transactions

with external parties. This is consistent with the entity concept
of consolidation, which defines the group as the net assets of
the parent, together with the net assets of the subsidiaries.
Transactions between these parties internal to the group must
be adjusted in full.
What is meant by ‘realisation of intragroup profits or
losses’?
Profits/losses are realised when an economic entity
transacts with another external entity. For a group, this is
consistent with the concept that the consolidated financial
statements show only the results of transactions with external
entities. The consolidated statement of profit or loss and other
comprehensive income will thus show only realised profits and
realised losses. Profits/losses recognised by group members on
sale of assets within the group are unrealised profits/losses to
the extent that the assets are still within the group. Realisation
of profits/losses on intragroup transactions involving assets
normally occurs when an external party gets involved. With
intragroup sales of inventories, involvement of an external
party, or realisation, occurs when the inventories are on-sold to
an external entity. With intragroup sales of depreciable assets,
realisation occurs as the asset is used up, as the benefits are
received by the group as a result of use of the asset. The
proportion of profits/losses realised in any one period is
measured by reference to the depreciation charged on the
transferred depreciable asset.

ADJUSTMENT OF UNREALISED PROFIT

Another common adjustment is the removal of
unrealised profit. This arises when profits are made on intra-
group trading and the related inventories have not
subsequently been sold to customers outside the group. Until
inventory is sold to entities out with the group, any profit is
unrealised and should be eliminated from the consolidated
accounts. In the consolidated statement of profit or loss we
must always consider two steps:
 Has there been any intra-group trading during the year,
irrespective of whether the goods are still included in
inventory at the year end?
 Do any of the items remain in inventory at the end of
the year?
REVALUATION OF ASSETS AND LIABILITIES
IFRS require fixed assets to be initially recorded at
cost, but there are two accounting models – the cost model and
the revaluation model.
In the revaluation model, an asset is initially recorded
at cost, but subsequently its carrying amount may be increased
to account for appreciation in value. The difference between
the cost model and revaluation model is that the revaluation
model allows both downward and upward adjustment in value
of an asset, while the cost model allows only downward
adjustment due to impairment loss. This is the model currently
adopted by IFRS

BONUS SHARES
The Subsidiary company may issue Bonus shares either
at the time of acquisition of shares by the holding company or
after the acquisition of shares by the Holding company. For
issuing bonus shares, the accumulated profits in the Balance
Sheet of the subsidiary company are employed. These profits
may be capital or revenue in nature or a combination of both.
At the time of bonus issue the share of the Holding company
as well as the minorities increases proportionately (in terms of
the ration of bonus issue) but the proportion of their ownership
remains the same as before. If bonus shares are issued out of
capital profits are adjusted accordingly and bonus shares
transferred to cost of control. If bonus shares issued out of
revenue profit of subsidiary company to that extent revenue
profit stand capitalized and will affect capital reserve or
goodwill as the case may be.
DIVIDEND ON EQUITY SHARES
The Subsidiary company may declare dividend on its
equity shares and the following are the possibilities with
respect to it.
a) Intention to propose dividend: In such a case since the
proposal has not been approved in the meeting the
intention may be ignored and no adjustment is required (in
terms of calculation) with respect to this dividend
intention.
b) Proposed dividend: It is possible that dividend has been
proposed in a meeting on the closing date of the financial

year but no notification of this fact has been made in the

books of the Holding company. In such a case, the amount
of dividend declared may be added to the profits of the
Subsidiary company (assuming this has been deducted) and
then the analysis of profits is performed in the usual
manner. No adjustment is needed in the books of the
Holding company.
c) Dividends Payable: In some cases, the dividends that have
been declared by the Subsidiary firm may have been
adjusted for in both the books i.e. the Subsidiary and
Holding company. In this case adjustment is made in the
books of the Subsidiary company. In the books of the
Holding company the dividend that are receivable from the
Subsidiary company will be credited to Profit and Loss
Account of the Holding company (in terms of income
receivable on investments).It is possible that these
dividends have been paid by the subsidiary firm out of
Capital profit, revenue profit, combination of both profit.
 If dividend of subsidiary company have been declared
totally out of capital profit, then it is incorrect that this
capital income should stand credited to the revenue
P/L Account of the holding company. Therefore one
adjustment entry is made for remaining dividend from
the P/L Account of the holding company and they are
transferred to cost of control.
P/L Account (H Ltd.) Dr To Cost of control/
Investment Account
(With the amount of dividend receivable from the
Subsidiary firm)

 If the dividend of the subsidiary firm have been

declared out of Revenue profit then they should be
credited to the P/L A/c. of the Holding Company and
of they are already included therein as per our
presumption, no adjustment is required.
 The dividend receivable by Holding Company may be
partly out of capital profit or out of revenue profit of
Subsidiary company. The portion paid out of capital
profit will be eliminated form P/L Account of Holding
company and transferred to cost of control with
respect to the portion of the dividend receivable out of
revenue profit no adjustment is required. With respect
to the minorities irrespective of the dividend declared
by the Subsidiary company being payable out of
capital profit or revenue profit will be added to
minority interest.
d) Dividend paid: The Subsidiary company may have
declared a dividend in the course of the financial year and
this fact has been adjusted for in both the books and in fact
the cash liability has already been met by subsidiary firm
for the purpose of dividend payment. This implies there is
no liability outstanding with respect to payment of
dividends therefore no addition on account dividends has
to be made to minority interest.
 the dividend must have been credited to P/L Account
out of capital profit, revenue profit are a combination
from the subsidiary company’s books. The portion out
of capital profit stated earlier will be transferred from

the P/L Account of the Holding company to the cost of

control.
 Share Premium: The share premium account may
appear in the Balance Sheet of the Holding company
at the time of consolidation. It will continue as share
premium account. However if the holding company
has issued some of its own shares to the subsidiary
company the share premium due on this share will be
adjusted for in the cost of control. If share premium
appears in the books of subsidiary company, it may be
prior to the acquisition of shares by the holding
company in which case it is treated as capital profit in
the analysis of profit. However, the share premium
arises after acquisition of share by a company it will
continue as share premium in the consolidated
Balance Sheet.
 Sale of Share: The holding company may sell some of
the share of the subsidiary company that it holds as
investment. The P/L on such sale is transfer to cost of
control. This changes the proportion of the Holding
company and minority interest and requires
adjustment in calculation of cost of control, minority
interest and an analysis of profit will have to be
performed.
 Purchase of shares in instalments: The Holding
company may acquire shares in the subsidiary firm not
in once single instalment but in a number of
instalments. If the earlier dates of the acquisition may

be ignored. If however, shares have been acquired in

major instalments, a step by step analysis of profit
after taking into consideration the dates of acquisition
will have to be performed in the analysis of profit
between capital and revenue.

MODULE II
ACCOUNTING FOR CORPORATE
RESTRUCTURING
Restructuring is the corporate management term for the

act of reorganizing the legal, ownership, operational or other
structures of a company for the purpose of making it more
profitable or better organized for its present needs. Alternate
reasons for restructuring include a change of ownership or
ownership structure, demerger or a response to a crisis or
major change in the business such as bankruptcy, repositioning
or buyout. Restructuring may also be described as corporate
restructuring, debt restructuring and financial restructuring.
A merger is defined as the joining of two or more
companies to form a single legal entity. Generally, the sets of
the smaller company are merged into those of the larger,
surviving company and shareholders of the target are either
bought out or become shareholders in the acquiring
corporation. A merger usually requires approval by the
shareholders of both the acquiring corporation and the target
entity. An acquisition, on the other hand, is the purchase of
more than 50% of the voting shares of one firm by another.
Following the acquisition of two companies can continue as
separate legal entities with the company referred to as the
parent company and the target as subsidiary. An acquisition
may be structured in one of the four forms: cash purchase of
assets, cash purchase of stock, issuance of stock for assets, or

issuance of stock for stock. In contrast to a merger, in an

acquisition the buyer can negotiate which assets it purchases
and which liabilities it assumes. Furthermore, if the transaction
is structured as an acquisition of the target’s stock, the buyer
negotiates only with the target shareholders for the sale of their
stock.
Acquisition accounting is a set of formal guidelines
describing how assets, liabilities, non-controlling interest
and goodwill of an acquired company must be reported by the
purchaser. The fair market value of the acquired company is
allocated between the net tangible and intangible assets portion
of the balance sheet of the buyer. Any resulting difference is
regarded as goodwill. All business combinations must be
treated as acquisitions for accounting purposes.
When a company is suffering loss for several past years
and suffering from financial difficulties, it may go for
reconstruction. In other words, when a company's balance
sheet shows huge accumulated losses, heavy fictitious and
intangible assets or is in financial difficulties or is to over
capitalized, and then the process of reconstruction is restored.
Types of Reconstruction
Reconstruction may be external or internal which are
described below:
1. External reconstruction: When a company is suffering
losses for the past several years and facing financial crisis,
the company can sell its business to another newly formed
company. Actually, the new company is formed to take

over the assets and liabilities of the old company. This

process is called external reconstruction. In other words,
external reconstruction refers to the sale of the business of
existing company to another company formed for the
purposed. In external reconstruction, one company is
liquidated and another new company is formed. The
liquidated company is called "Vendor Company" and the
new company is called "Purchasing Company".
Shareholders of vendor company become the shareholders
of purchasing company.
2. Internal reconstruction: refers to the internal re-
organization of the financial structure of a company. It is
also termed as re-organization which permits the existing
company to be continued. Generally, share capital is
reduced to write off the past accumulated losses of the
company. The accounting procedure of internal
reconstruction is distinct from that of amalgamation,
absorption and external reconstruction.
ACCOUNTING FOR LIQUIDATION OF COMPANIES
A company comes into being through a legal process
and also comes to an end by the law. Liquidation is the legal
procedure by which the company comes to an end. Thus a
company being a creation of law, cannot die a natural death. A
company, when found necessary, can be liquidated. The terms
‘break-up basis’ and ‘liquidation basis’ are not defined terms
that are used in IFRS but are ones that are used informally.
‘Break-up basis’ is used in some countries to signify that an
entity is at a stage where its assets are being realized or are

about to be realized as part of the process of liquidating the

entity. In other countries the terms ‘liquidation basis’ or ‘an
orderly realisation basis’ are used and are broadly equivalent in
nature. An informative description of the preparation basis
adopted will often be more important than the label attributed
to it. A second point is that each situation needs to be assessed
on its own facts and circumstances as some entities in a non-
going concern situation will be closer to liquidation or ceasing
trading than others. The accounting will typically reflect this.
For example, when an entity is in the process of being
liquidated or will be liquidated imminently, the financial
statements might be prepared under what is sometimes referred
to as a ‘break-up basis’ or ‘liquidation basis’. Quantification of
the amount of any surplus that may be available for
distribution to the shareholders (i.e. what the value of the
entity will be when it is ‘broken up’ into its separate parts on
liquidation).
STATEMENT OF AFFAIRS
A Statement of Affairs is a document detailing a
company’s assets and liabilities. Generally prepared by a
liquidator or appointed professional during certain insolvency
proceedings, the document is later registered at Companies
House, where it becomes available for public view.
The Statement of Affairs includes details of any fixed
or floating charges secured on company assets, and provides
detailed information for interested parties – generally creditors,
shareholders and the Insolvency Practitioner (IP), but the
document could also prove to be of interest to potential buyers.

The Statement of Affair is a summary of Company’s assets

and liabilities. It states a net book value and amount expected
to realize at the date of insolvency of the business.
Accompanying the balance sheet is a list of creditors and
shareholders.
As per Section 454 of the Companies Act, the Officers
or Directors of the Company under winding up order, must
make out and submit, within 21 days of the court’s order, or
within such extended time, not exceeding three months’ time,
as the liquidator or court may allow, a statement containing the
following particulars.
(a) The assets of the company, stating separately the cash
balance in hand and at the bank, if any, and negotiable
securities, if any, held by the company.
(b) Its debts and liabilities.
(c) The names, residences and occupations of its creditors,
stating separately the amount of secured and unsecured debts;
and in the case of secured debts, particulars of the securities
given, whether by the company or an officer thereof, their
value and the dates on which they were given.
(d) The debts due to the company and the names, residences
and occupations of the persons from whom they are due and
the amount likely to be realised on account thereof.
(e) Such further or other information as may be prescribed or
as the official liquidator may require.
The statement must be in the prescribed form and properly
verified by an affidavit. It should be open for inspection by a
creditor, or contributory of the company, on payment of a

prescribed fee. The concerned creditor or contributory can also
have an extract from it.
DEFICIENCY/SURPLUS ACCOUNT
An account supplementing the balance sheet of a
financially weak enterprise showing estimated realization
values of assets and their insufficiency to meet creditors'
claims and occasionally indicating the causes of the difficulty
is called as deficiency account. On the other hand, a surplus is
the residual amount of resources remaining after a period of
usage. In the accounting area, a surplus refers to the amount of
retained earnings recorded on an entity's balance sheet; a
surplus is considered to be good, since it implies that there are
excess resources available that can be used in the future. An
account supplementing the surplus fund is known as surplus
account.
LIQUIDATOR’S FINAL STATEMENT OF ACCOUNT
The liquidator’s task is to realize the assets and
disburse the amounts among those who have a rightful claim to
it; in every case the liquidator has to prepare a statement
showing how much he realized and how the amount was
distributed.
The following is the order in which disbursements will be
made by the liquidator:—
(a) Secured creditors up to their claim or up to the amount
realized by sale of securities held by them, whichever is less.
The creditors themselves may sell the securities; they will pay

to the liquidator any surplus after meeting their claims. Only

the surplus is shown as a receipt; the payment to secured
creditors is not shown in the liquidator’s final statement of
account. The balance left unsatisfied—that is when the claims
of the creditors are more than the amount realized by sale of
securities—will be added to unsecured creditors.
(b) Legal charges.
(c) Remuneration to the liquidator.
(d) Costs of winding up.
(e) Preferential creditors.
(f) Debenture holders or other creditors having a floating
charge on the assets of the company. (While preparing the
Liquidator’s Statement of Account, payment to preferential
creditors is shown, however, after the payment to debenture
holders having a floating charge.)
(g) Unsecured creditors. (This may include liability in respect
of dividend or amounts due to shareholders on account of
profits. In this case, the amount in respect of dividends, etc.,
shall be paid only after the outsiders are satisfied.)
(h) Preference shareholders,
(i) Equity shareholders. Unless the articles contain provisions
to the effect that preference shareholders are entitled to
participate in the surplus left after meeting the claims of the
equity shareholders in full, the whole of the amount left after
payment to preference shareholders will go to the equity
shareholders.

The various claims have priority in the order mentioned

above. Hence, if the amount available is exhausted after
paying, say, the preferential creditors, payment cannot be made
to unsecured creditors or anybody else coming after the
preferential creditors. The form prescribed by the Supreme
Court is given later. While preparing the Liquidator’s
Statement of Account, it should be noted that there is no
double entry involved. It is only a statement although
presented in the form of an account. (It is really a summary of
the Cash Book after the start of liquidation).
Liquidator’s Remuneration. In case of compulsory
winding up, the remuneration is fixed by the Court and the
amount is payable to the Court since the official liquidator is a
salaried employee of the Government. In case of voluntary
winding up, the remuneration is fixed by the meeting which
appoints the liquidator. The remuneration once fixed cannot be
increased. Usually, the remuneration consists of a commission
on assets realized plus a commission on the amount paid to
unsecured creditors. Unsecured creditors include preferential
creditors unless otherwise stated. The commission on
unsecured creditors is on the amount paid and hence care
should be exercised in calculating the commission.
RECEIVER’S STATEMENT OF ACCOUNTS
A receiver is generally appointed by the Court to take
possession of certain property for protective purposes or for
receiving income and profits from the property and for
applying it as directed. Sometimes, a mortgagee is also given
the power to appoint a receiver in certain circumstances. The

debenture-holders may have the power under the Debenture

Deed. The Receiver will have the duty of duly accounting for
the sums received by him. In case the company is being wound
up, the Receiver (if appointed) will have to observe the rule
regarding preferential payments and after paying the
mortgagee by whom he is appointed (or paying those persons
for whose protection he is appointed by the Court) he will have
to hand over the surplus to the Liquidator. There will thus be
two accounts: (1) the Receiver’s Statement of Account and (2)
Liquidator’s Final Statement of Account. The Receiver is
entitled to recover his expenses and remuneration from sums
collected by him.
Problems
1. The following is the draft Balance Sheet of Diverse Lt.
having an authorized capital of Rs. 1,000 crores as on
31st March, 2017:
(Rs. in crores)
I. Equity and Liabilities
1. Shareholders’ fund
a) Share Capital
Equity shares of 10 each fully 250
paid up
750 1,000
b) Reserves and Surplus
(Revenue)
2. Non-current Liabilities
Long term borrowings
400
Secured against: (a) Fixed assets

Rs.300 Cr. 600 1,000

(b) Working Capital 2,000
Rs. 100 Cr. 4,000
Unsecured
3. Current Liabilities
II. Assets
1. Non – Current Assets
a) Fixed assets
(i) Tangible Assets 800
Gross Block (200) 600
Less: Depreciation 400
b) Investment at Cost (Market 3,000
Value Rs. 1,000 Cr.)
4,000
2. Current Assets
Capital Commitments: Rs.700 Crores

The company consists of 2 divisions:
i. Established division whose gross block was Rs. 200
Crores and net block was Rs.30 Crores; current assets
were Rs. 1,500 Crores And working capital Rs. 1,200
Crores; the entire amount being financed by
shareholders’ funds.
ii. New project divisions to which remaining fixed assets,
current assets and current liabilities related.
The following scheme of reconstruction was agreed upon:

a) Two companies, Sunrise Ltd. And Khajana Ltd. Are to

be formed. The authorized capital of Sunrise Ltd. is Rs.
1,000 Crores. The authorized capital of Khajana Ltd. is
Rs. 500 Crores.
b) Khajana Ltd. Is to take over investments at Rs. 800
Crores and unsecured loans at balance sheet value. It is to
allot equity shares of Rs. 10 each at par to the members
of Diverse Ltd. In satisfaction of the amount due under
agreement.
c) Sunrise Ltd. is to take over the fixed assets and Net
working capital of the new project division along with
the secured loans and obligation of capital commitments
for which Diverse Ltd. is to continue stand guarantee at
book values. It is to allot one crore equity shares of Rs.
10 each as consideration to Diverse Ltd. Sunrise Ltd
made an issue of unsecured convertible debentures of
Rs.500 crores carrying interest at 15% per annum and
having right to convert into equity shares of Rs.10 each
at par on 31.3. 2019. The issue was made to the members
of Sunrise Ltd. as a right who grabbed the opportunity
and subscribed in full.
d) Diverse Ltd. is to guarantee all liabilities transferred to
the 2 companies.
e) Diverse Ltd. is to make a bonus issue of equity shares in
the ratio of one equity share for every equity share held
by making use of the revenue reserves.

Assume that the above scheme was duly approved by the

Honourable High Court and that there are no other
transactions. Ignore taxation.
You are asked to:
i. Pass journal entries in the books of Diverse Ltd. ,
and
ii. Prepare the balance sheet of the three companies
and the scheme of arrangement.
Ans:
Journal of Diverse Ltd.
Transactions with Khajana Ltd.
(Rs. in crores)
1 Khajana Ltd. A/c 200

Dr. 600
Unsecured Loans A/c 400
Dr. 400
To Investment A/c
To Members A/c
(Being transfer to investments at
agreed value of Rs. 800 crores,
unsecured loans at Rs.600 crores) N.1
2 Members A/c 200
Dr. 200
To Khajana Ltd. A/c
(Being consideration received from
Khajana Ltd.)

3 Members A/c
Dr.
To Capital Reserve A/c
(Being balance in members A/c
transferred)
Transactions with Sunrise Ltd.

(Rs. in crores)
1 Sunrise Ltd. A/c (1 cr. Equity shares x 10
Rs.10 each) Dr. 30
Provision for depreciation A/c (N.2) 300
Dr. 100
Secured loans against fixed asset A/c 1,700
Dr.
600
Secured loans against working capital
A/c Dr. 1,500
Current Liabilities A/c (N.2) 40
Dr.
To Fixed Assets A/c (N.2)
To Current Assets A/c
(N.2)
To Capital Reserve A/c
(Being assets and liabilities of new
project division transferred to Sunrise
Ltd. along with capital commitments
of Rs.700 crores, the differences
between consideration and the book
values at which transferred assets and
liabilities appeared being credited to
capital reserve.)

2 Equity shares of Sunrise Ltd. 10

Dr. 10
To Khajana Ltd. A/c
(Being the receipt of one crore equity
shares at Rs.10 each from Sunrise Ltd.
in full discharge of consideration on
transfer of assets and liabilities of new
project division)
3 Investment in Debentures A/c 500
Dr. 500
To Bank A/c
(Being issue of unsecured convertible
debentures by Sunrise Ltd., subscribed
in full)
4 Revenue Reserves A/c 250
Dr. 250
To Equity Share capital A/c
(Being allotment of 25 crores equity
shares of Rs.10 each as fully paid
bonus shares to the members of the
company by using revenue reserves in
the ratio of one equity share for every
equity share held.

Diverse Ltd.
Balance Sheet after the scheme of arrangement
Note (Rs. in
No. crores)
I Equity and liabilities
(1) Share holders’ funds:
1 500
(a) Share Capital
(b) Reserves and surplus 2 740 1,240
(2) Current liabilities 300
Total 1,540
II
Assets
(1) Non-current Assets
(a) Fixed assets: 3 30
(b) Non-current 510
4
investments
(2) Current assets (1,500 – 1,000
500)
Total 1,540
1. Capital commitments Nil
2. Contingent Liability
Guarantee given in respect of:
Capital commitments by 700
Sunrise Ltd.
Liabilities transferred to 2100
Sunrise Ltd.
Liabilities transferred to 600
Khajana Ltd.

Notes to Accounts
(Rs. in crores)
1 Share capital:
Authorized capital:
100 crores Equity Shares of Rs.10 each 1,000
Issued, subscribed and paid up capital 50 500
crores Equity Shares of Rs.10 each fully
paid-up
Of the above shares, 25 crores fully paid
Equity Shares of Rs.10 each have been
issued as bonus shares by capitalization of
revenue reserves.
2 Reserves and Surplus:
1. Capital Reserve on transfer of:
Investments to Khajana Ltd. 200
Business of new project division to 40 240
Sunrise Ltd.
2. Surpluses (profit and loss Account):
As per last balance sheet 750
Less: Used for issue of fully paid 250 500
bonus shares
3 Fixed assets: 740
Gross block:
Less: Transfer to Sunrise Ltd. (600) 200

Provision for depreciation:

Less: In respect of assets transferred (30) (170)
to Sunrise Ltd.
4
Investments (at cost): 30
Investment in Equity Instruments

In wholly owned subsidiary Sunrise
Ltd.
1 crore equity shares of `10 each 10
Investment in Debentures and bonds
15% unsecured convertible debentures 500
510
Balance Sheet of Sunrise Ltd. after the scheme of arrangement

Note No. (Rs. in crores)
I Equity and liabilities
(1) Shareholders’ funds:
(a) Share Capital 1 10
(2) Non-current liabilities:
(a) Long term borrowings
Secured loans 2 400
Unsecured loans 3 500 900


Total 2,610
II Assets
1. Non-current assets
(a) Fixed assets
(i) Tangible assets 570
(ii) Intangible assets 40 610
(Goodwill)
(2) Current assets
(a) Cash and Cash equivalents 500
(b) Other current Asset 1,500 2,000
Total 2,610
Capital commitments
Guarantee given by Diverse Ltd.
in respect of :
Capital Commitments 700
Liabilities 2,100

Notes to Accounts
(Rs. in crores)
1 Share Capital
Authorized Capital
100 crores Equity Shares of Rs.10 each 1,000
Issued, Subscribed and Paid-up capital 1 crore
Equity Shares of Rs.10 each fully paid-up 10
(All the above shares have been issued for
consideration other than cash, on takeover of
new project division from Diverse Ltd.
All the above shares are held by the holding
company Diverse Ltd.)
2 Secured Loans
(a) Against fixed assets 300
(b) Against working capital 100
3 Unsecured Loans 400
15% Unsecured convertible Debentures 500

- Convertible into equity shares of Rs.10 each
at par on 31.3.2019

Balance Sheet of Khanjana Ltd. after the scheme of

arrangement
Note (Rs. in
No. crores)
I. Equity and liabilities
(1) Share holders’ funds:
1
(a) Share Capital 200
(2) Non-current liabilities:
(a) Long term borrowings
Unsecured loans 600
Total 800
II. Assets
Non-current investments 800
Total 800
Guarantee given by Diverse Ltd. in
respect of unsecured loans

Notes to Accounts
(Rs.in
crores)
1 Share Capital
Authorized
50 crores Equity Shares of Rs.10 each 500
Issued, Subscribed and Paid-up
20 crores Equity Shares of Rs.10 each 200
fully paid-up
(All the above shares have been issued to
members of Diverse Ltd. for consideration
other than cash, on acquisition of investments
and taking over of liability for unsecured
loans from Diverse Ltd.)
Working Notes:
1. Amount Due from Khajana Ltd.
Investments 800
Less: Unsecured Loans (600)
Net Consideration 200

2. Segregation of Assets &Liabilities between

Established and New Division
As per information in point (i)
New
Established
Project
Particulars Total (A) Division
Division
(B)
(A-B)
1 Gross Block 800(Given) 200(Given) 600(A-B)
Net Block 600(Given) 30(Given) 570(A-B)
Provision for 200 170 30
Depreciation
2 Current Assets 3,000 1,500 (Given) 1,500 (A-
(Given) B)
Working Capital 1,000 1,200(Given) (200)(A-
(Given) B)
Current 2,000 300 1,700
Liabilities
(Rs.in crores)
New
Established
Project Total
division division
1. Fixed assets:
Gross block 200 600 800
Less: Depreciation (170) (30) (200)
30 570 600

Current assets 1,500 1,500 3,000

Less: Current liabilities (300) (1,700) (2,000)
Employment of funds 1,200 (200) 1,000
2. Guarantee by Diverse
Ltd. against:
(a) (i) Capital 700
commitments
(ii) Liabilities
transferred to Sunrise
Ltd.
Secured loans against 300
fixed assets
Secured loans against 100
working capital
Current liabilities 1,700 2,100
(b) Liabilities 600
transferred to Khajana
Ltd.
2. Enterprise Ltd. has 2 divisions Laptops and Mobiles.

Division Laptops has been making constant profits while
division Mobiles has been invariably suffering losses.

On 31st March, 2017, the division-wise draft Balance

Sheet was:
(Rs. in crores)
Lap Mobiles Total
tops
Fixed assets cost 250 500 750
Depreciation (225) (400) (625)
Net Assets 25 100 125
Current assets: 200 500 700
Less: Current liabilities (25) (400) (425)
(B) 175 100 275
Total (A+B) 200 200 400
Financed by:
Loan funds - 300 300
Capital : Equity Rs.10 each 25 - 25
Surplus 175 (100) 75
200 200 400
Division Mobiles along with its assets and liabilities

was sold for Rs.25 crores to Turnaround Ltd. a new
company, who allotted 1 crore equity shares of Rs.10 each at
a premium of Rs.15 per share to the members of Enterprise
Ltd. in full settlement of the consideration, in proportion to
their shareholding in the company.
Assuming that there are no other transactions, you are
asked to:

(i) Pass journal entries in the books of Enterprise Ltd.

(ii) Prepare the Balance Sheet of Enterprise Ltd. after
the entries in (i).
(iii) Prepare the Balance Sheet of Turn around Ltd.
Ans.
Journal of Enterprise Ltd.
(Rs. in crores)
Dr. Cr.
Rs. Rs.
(1) Turnaround Ltd. Dr. 25
Loan Funds Dr. 300
Current Liabilities Dr. 400
Provision for Depreciation Dr. 400
To Fixed Assets 500
To Current Assets 500
To Capital Reserve 125
(Being division Mobiles along
with its assets and
liabilities sold to Turnaround
Ltd. for Rs.25 crores)
(2) Capital Reserve Dr. 25
To Turnaround Ltd. 25
(Being allotment of 1 crore
equity shares of Rs. 10 each

at a premium of ` 15 per share

to the members of
Enterprise Ltd. in full
settlement of the consideration)
Notes:
(1) Any other alternative set of entries, with the
same net effect on various accounts, may be
given by the students.
(2) Profitonsaleofdivisionmay,alternatively,becredit
edtoProfitandLossAccountinsteadofCapital
Reserve,inaccordancewiththerequirementsofAS5
(Revised)onNetProfitorLossforthePeriod, Prior
Period Items and changes in Accounting
Policies.
Enterprise Ltd.
Balance Sheet after reconstruction
(Rs. in crores)
Note
No.
(1) Share holders’funds
(a) Share Capital 25
(b) Reserves and surplus 1 175 200
(2) Current Liabilities 25
Total 225

II. Assets
(1) Non-current assets
(a) Fixed assets 25
(2) Current assets 200
Total 225
Notes to Accounts
(Rs. in
crores)
1. Reserves and Surplus 75
Add: Capital Reserve on reconstruction 100
175
Note to Accounts: Consequent on transfer of Division
Mobiles to newly incorporated company Turn around
Ltd., the members of the company have been allotted 1
crore equity shares of Rs.10 each at a premium of Rs. 15
per share of Turnaround Ltd., in full settlement of the
consideration in proportion to their shareholding in the
company.

Balance Sheet of Turnaround Ltd.

(Rs. in crores)
Note
No.
(1) Share holders’Vfunds
(b) Reserves
and surplus: 15 25
Securities
Premium
(2) Non-current liabilities
Long term 300
borrowings
Total 725
II. Assets
Fixed assets
(i) Tangible assets 100
(ii) Intangible 2 125 225
assets
Total 725

Notes to Accounts
(Rs. in crores)
1. Share Capital:
Issued and Paid-up capital
1 crore Equity shares of ` 10 each 10
fully paid up
(All the above shares have been
issued for consideration other than
cash, to the members of Enterprise
Ltd. on takeover of Division
Mobiles from Enterprise Ltd.)
2. Intangibles Assets:
Goodwill (N.1) 125
Working Note
1. Calculation of Goodwill/Capital Reserve for
Turnaround Ltd. Assets taken over
Non-Current Assets 100
Current Assets 500
Total Assets (A) 600
Loan Funds 300
Current Liabilities 400
Total Liabilities (B) 700

Net Assets C= (A-B) (100)

Purchase Consideration (given) (D) 25
Goodwill (D-C) 125
3. Kuber Ltd. a non-listed company, furnishes you with

the following draft Balance Sheet as at 31st March,2017:
(Rs. in
crores)
Equity and liabilities
(1) Share holders’ funds
(a) Share Capital:
Authorized capital
100
Issued, subscribed and paid up
capital
12% Redeemable preference 75
100
shares of Rs.100 each fully
paid
Equity shares of ` 10 each fully paid 25
(b) Reserves and surplus:
Capital reserve 15
Securities premium 25
Surplus (profit and loss account) 260 300


440
Assets
1. Non-current assets
Fixed assets: Cost 100
Less: Provision for depreciation Nil
2. Non-current Investments at cost (market (100) 100
value Rs. 400Cr.)
3. Current assets 340
440
The company redeemed preference shares on 1st April,

2017. It also bought back 50 lakh equity shares of Rs.10 each
at Rs. 50 per share. The payments for the above were made out
of the huge bank balances, which appeared as part of current
assets.
You are asked to:
(i) Pass journal entries to record the above
(ii) Prepare balance sheet
(iii) Value equity share on net asset basis.

Ans.
Journal of Kuber Ltd.
(Rs. in crores)
Dr. Cr.
Rs. Rs.
Redeemable preference share capitalDr. 75
Account
To Bank Account 75
(Being redemption of 12% preference
shares pursuant to capital re-
organisation)
Revenue reserves Account Dr. 75
To Capital redemption reserve 75
Account
(Being amount equal to par value of
preference shares redeemed out of profits
transferred to capital redemption reserve)
Equity share capital Account Dr. 5
Securities Premium Account Dr. 20
To Bank Account 25
(Being buy-back of 50 lakh equity
sharesof Rs.10 each from the members
at a price of ` 50 per share, premium
paid transferred to Securities Premium
Account) 5
Revenue reserves Dr. 5
To Capital redemption
reserve
(Being transfer to capital redemption reserve,
on buy-back out of reserves)
Kuber Ltd.
Balance Sheet (after reconstruction)
Note (Rs. in
No. crores)
(1) Shareholders’funds
(a) Share Capital 1. 20
(b) Reserves and 2. 280 300
Surplus
Total 340
II. Assets
(1) Non-current Assets
(a) Fixed Assets – -
(100-100)
(b) Non-current 100
investments (market
value: Rs. 400 crores)
Total 340

Notes to Accounts
(Rs. in crores)
1. Share Capital
1. Authorised Capital 100
2. Issued, Subscribed and
Paid-up
200 lakhs Equity Shares of ` 20
10 each fully paid up
(50 lakhs Equity Shares of ` 10
each have been bought back out
of Securities Premium account
at ` 50 per share and 12% 75
lakhs Redeemable Preference
Shares of ` 100 each fully paid
up, have been redeemed on 1st
April, 2017)
2. Reserves and Surplus
(1) Capital Reserve 15
(2) Capital Redemption
Reserve
As per last account
Add: Transfer from 80
Revenue Reserves (75 + 5)
(3) Securities Premium 5

Reserve (25 -20)

(4) Surplus (Profit and Loss
A/c)
As per last account 260
Less: Transfer to Capital (80) 180
Redemption Reserve (75 +
5)
280
Net asset value of an equity share

( Rs.in
crores)
Investments (at market value) 400
Net current assets 200
Net assets available to equity shareholders 600
No. of equity shares : 2 crores
Value of equity shares = 600 crores =
Rs. 300 crores
2 crores
Note: As regards treatment of loss (profit) on buy-back,

there is no authoritative pronouncement as to whether the
difference between the nominal value and the amount paid
should be treated as capital or revenue in nature. In the given

case, the debit has been given to Securities premium

account. Also, in the absence of any other information, it
may be assumed that shares have been bought back out of
free reserves. However, the securities premium account has
restrictive use. Therefore, the companies may opt to utilize
the securities premium account for buy back, if available,
rather to use the free reserves which can be used for other
purposes infuture.
4. Maxi Mini Ltd. has 2 divisions - Maxi and
Mini.The draft Balance Sheet as at 31st October,
2017 was asunder:
Maxi Mini Total
division division (in crores)
Rs. Rs. Rs.
Fixed assets:
Cost 600 300 900
Depreciation (500) (100) (600)
W.D.V. (A) 100 200 300
Net current assets:
Current assets 400 300 700
Less: Current liabilities (100) (100) (200)
(B) 300 200 500
Total (A+B) 400 400 800
Financed by :
Loanfunds (A) 100 100
(secured by a charge on
fixed assets)
Own funds:

Equity capital 50
(fully paid up ` 10 shares)
Reserves and surplus 650
(B) 700
Total (A+B) 400 400 800
It is decided to form a new company Mini Ltd. to take over the

assets and liabilities of Mini division. Accordingly Mini Ltd.
was incorporated to take over at Balance Sheet figures the
assets and liabilities of that division. Mini Ltd. is to allot 5
crores equity shares of ` 10 each in the company to the
members of Maxi Mini Ltd. in full settlement of the
consideration. The members of Maxi Mini Ltd. are therefore to
become members of Mini Ltd. as well without having to make
any further investment.
(a) You are asked to pass journal entries in relation
to the above in the books of Maxi Mini Ltd. and
Mini Ltd. Also show the Balance Sheets of the 2
companies as on the morning of 1st November,
2017, showing corresponding previous year’s
figures.
(b) The directors of the 2 companies ask you to find
out the net asset value of equity shares pre and
post demerger.
(c) Comment on the impact of demerger on
“shareholders wealth”.

Ans.
Demerged Company: Mini Division of “Maxi Mini
Ltd.’’
Resulting Company: “Mini Ltd.”
(a) Journal of Maxi Mini Ltd. (Demerged Company)
(Rs.in crores)
Dr. Cr.
Rs. Rs.
Current liabilities A/c Dr. 100
Loan fund (secured) A/c Dr. 100
Provision for depreciation A/c Dr. 100
Loss on reconstruction (BalancingDr. 300
figure) 300
To Fixed Assets A/c
To Current assets A/c 300
(Being the assets and liabilities of Mini
division taken out of the books on transfer of
the division to Mini Ltd., the consideration
being allotment to the members of the
company of one equity share of ` 10 each of
that company at par for every share held in
the company vide scheme of reorganization)

Journal of Mini Ltd.

(Rs. in
crores)
Dr. Cr.
Rs. Rs.
Fixed assets (300-100) A/c Dr. 200
Current assets A/c Dr. 300
To Current liabilities A/c 100
To Secured loan funds 100
A/c
To Equity share capital 50
A/c
To Capital reserve 250
(Being the assets and liabilities of
Mini division of Maxi Mini Ltd.
taken over and allotment of 5
croresequity shares of Rs.10 each at
part as fully paid up to the members
of Maxi Mini Ltd.)

Maxi Mini Ltd.

Balance Sheet as at 1st November, 2017
(Rs. in crores)
Note After Before
No. reconstructionReconstruction

(1) Shareholder’s
funds
(a) Share Capital 1 50 50
(b) Reserves and
350 650
Surplus
(2) Non-current
400 700
liabilities
Secured loan - 100
(3) Current liabilities 100 200
Total –
500 1,000
II. Assets
(1) Non-
CurrentAssets 2
Fixed assets : 100 300
(2) Current assets 400 700
Total 500 1,000

Notes to Accounts
After Before
reconstruction reconstruction
1. Reserves and Surplus 650 650
Less: Loss on (300) –
reconstruction
350 650
2. Fixed Assets 600 900
Less: Depreciation (500) (600)
100 300
Note to Accounts: Consequent on reconstruction of the
company and transfer of Mini division to newly
incorporated company Mini Ltd., the members of the
company have been allotted 5 crores equity shares of Rs.
10 each at part of Mini Ltd.

Mini Ltd.
Balance Sheet as at 1 November, 2017
Note (Rs. in crores)
No.
(1) Shareholder’s funds
(b) Reserves and 250
Surplus 300
(2) Non-current
liabilities
Secured loans 100
(3) Current iabilities 100
Total 500
II. Assets
(a) Fixed assets 200
Total 500

Notes to Account
(Rs.
in
crores)
1. Share Capital:
Issued and paid up :
5 crores Equity shares of ` 10 each fully paid
up 50
(All the above shares have been issued for
consideration other than cash, to the
members of Maxi Mini Ltd., on takeover of
Mini division from Maxi MiniLtd.)
(b) Net asset value of an equity share

Pre-demerger
Post- demerger
Maxi Mini Ltd.: Rs.700 crores = Rs. 140
Rs.400 crores = Rs. 80
5 crores 5 crores
Mini Ltd.: Rs.300 crores = Rs.80 5 crores

(c) Demerger into two companies has had no
impact on “net asset value” of shareholding.
Pre- demerger, it was Rs. 140 per share. After
demerger, it is Rs.80 plus Rs.60 i.e. Rs.140 per

original share. It is only yield valuation that is

expected to change because of separate focusing
on two distinct businesses whereby profitability
is likely to improve on account of demerger.
A Ltd. agreed to absorb B Ltd. on 31st March 2017, whose

summarized balance sheet stood as follows:
Equity and Liabilities Rs. Assets Rs.
Share Capital
80,000 shares of Fixed Assets 7,00,000
` 10 each fully paid 8,00,000 Investments –
Reserves & Surplus Current Assets
General Reserve 1,00,000 Loans &
Advances
Secured Loan — Inventory in 1,00,000
trade
Unsecured Loan — Trade 2,00,000
receivables
Current Liabilities &
Provisions
Trade payables 1,00,000
10,00,000 10,00,000
The consideration was agreed to be paid as follows:
(a) A payment in cash of Rs.5 per share in B Ltd. and

(b) The issue of shares of Rs.10 each in A Ltd., on

the basis of 2 Equity Shares (valued at Rs.15)
and one 10% cumulative preference share
(valued at Rs.10) for every five shares held in B
Ltd.
The whole of the share capital consists of
shareholdings in exact multiple of five except the
following holding.
Chopra 116
Karki 76
Amar Singh 72
Malhotra 28
Other individuals 8 (eight members holding one
shareeach)
300
It was agreed that A Ltd. will pay in cash for fractional shares
equivalent at agreed value of shares in B Ltd. i.e. ` 65 for five
shares of ` 50 paid.
Prepare a statement showing the purchase consideration
receivable in shares and cash.

Ans.
(a) Schedule of Fraction
Exchange
Holding Exchangeable in Preference Non
of in nearest equity Exchangeable (E)=
Shares multiple of (C) = (D) = (A) –
(A) five (B) (B) / 5 (B) / 5 X 1 (B)
X2
Chopra 116 115 46 23 1
Karki 76 75 30 15 1
Amarsingh 72 70 28 14 2
Malhotra 28 25 10 5 3
Others 8 - - - 8
300 285 114 57 15
Shares Exchangeable: Equity Shares in ALtd.
No. No.
(i) 80,000–300 (Total A 79,700 2/5 there of 31,880
above)
300-15 (Total E Above) 285 2/5 there of 114
79,985 31,994

Shares Exchangeable: Preference Shares in A Ltd.
Shares held
as in b (i) 1/5 there of
as in b (ii) 1/5 there of 57
(b) There are 15 shares in B Ltd. which are not

capable of exchange into equity and
preference shares of A Ltd. they will be paid
150 x 65 = Rs.195
50
Purchase Consideration Rs.
31,994 Equity Shares @ Rs.15 each 4,79,910
15,997 Preference shares @ Rs.10 each 1,59,970
Cash on 79,985 @ Rs.5 each 3,99,925
10,39,805
Add: Cash for 15 shares 195
10,40,000

MODULE III
ACCOUNTING FOR TAXATION
It is important to understand how to account for

taxation, because it has an impact on the income statement (in
the tax expense account) and the balance sheet (in the income
tax and deferred tax accounts). The tax expense on the income
statement has three components: the tax charge for the period;
any under- or over-provision of tax for the previous period;
and the increase or decrease in the deferred tax provision.
CURRENT TAX EXPENSE
Current tax is defined as the amount of income taxes
payable/ (recoverable) in respect of the taxable profit/ (tax
loss) for a period. It is the tax that the entity expects to pay/
(recover) in respect of a financial period
DEFFERED TAX
The tax effect on the timing differences is termed as
deferred tax which literally means taxes which are deferred.
Deferred tax is recognized on all timing difference –
Temporary and Permanent.
These deferred taxes are given effect to in the financial
statements through Deferred Tax Asset and Liability as under:
Sl. Entity – Entity–
Entity Profit Status Effect
No Current Future
1 Book profit higher Pay less tax Pay more Creates

than the Taxable now tax inDeferred Tax

profit future Liability

(DTL)
Book profit is less Pay less Creates
Pay more
2 than the Taxable tax inDeferred Tax
tax now
profit future Asset (DTA)
With respect to timing differences related to

unabsorbed depreciation or carry forward losses, DTA is
recognized only if there is future virtual certainty. It means
DTA can be realized only when the company reliably
estimates sufficient future taxable income. This test for virtual
certainty has to be done every year on balance sheet date and if
the condition is not fulfilled, such DTA/DTL should be written
off.
While computing future taxable income, only profits
pertaining Business and Professional should be considered and
not the income from other sources.
A deferred tax liability as being the amount of income
tax payable in future periods in respect of taxable temporary
differences. So, in simple terms, deferred tax is tax that is
payable in the future. However, to understand this definition
more fully, it is necessary to explain the term ‘taxable
temporary differences’.
Temporary differences are defined as being differences
between the carrying amount of an asset (or liability) within
the Statement of Financial Position and its tax base i.e. the
amount at which the asset (or liability) is valued for tax
purposes by the relevant tax authority.Taxable temporary
differences are those on which tax will be charged in the future

when the asset (or liability) is recovered (or settled).
A deferred tax liability is recorded in respect of all taxable
temporary differences that exist at the year-end – this is
sometimes known as the full provision method.
Within financial statements, non-current assets with a

limited economic life are subject to depreciation. However,
within tax computations, non-current assets are subject to
capital allowances (also known as tax depreciation) at rates set
within the relevant tax legislation. Where at the year-end the
cumulative depreciation charged and the cumulative capital
allowances claimed are different, the carrying value of the
asset (cost less accumulated depreciation) will then be different
to its tax base (cost less accumulated capital allowances) and
hence a taxable temporary difference arises.
Assets:
Financial statement basis > tax basis = TTD
Financial statement basis <tax basis = DTD
Liabilities:
Financial statement basis > tax basis = DTD
Financial statement basis <tax basis = TTD
Taxable Temporary Differences (TTD)
• These will result in taxable amounts when an asset is
recovered or a liability is settled.

• Hence, these result in deferred tax liabilities. This means

the company will pay more tax in the future.
Items that give rise to taxable temporary differences are:
• Receivables resulting from sales.
• Prepaid expenses.
• Tax depreciation rates > accounting rates.
• Development costs capitalized and amortized.
Deductible Temporary Differences (DTD)
• These will result in deductible amounts when an asset is
recovered or a liability is settled.
• Hence, these result in deferred tax assets. This means the
company will pay less tax in the future.
Items that give rise to deductible temporary differences are:
• Accrued expenses.
• Unearned revenue.
• Tax depreciation rates < accounting rates.
• Tax losses.
Deferred Tax Liability (DTL) or Deferred Tax Asset
(DTA) item forms an important part of your Financial
Statements.
The basic difference between deferred tax asset and
deferred tax liability is the difference in income that is
computed as per the provisions of different laws. Some
differences that arise due to application of different provisions

of law are temporary differences i.e. the differences that get

eliminated over a period of time. These temporary differences
are accounted for, recognized and carried forward in the books
of accounts and accordingly Deferred tax asset A/c and
Deferred tax liability A/c are created. The following table
shows the major differences between Deferred Tax Asset and
Deferred Tax Liability: -
Deferred Tax Deferred Tax Liability

Asset
1 When profits as per tax 1 When profits as per tax
laws is more than profits laws is less than profits as
as per books of accounts, per books of accounts,
Deferred tax asset is Deferred tax liability is
required to be created. required to be created.
2 Deferred Tax Asset 2 Deferred Tax liability
journal entry journal entry
Deferred Tax Asset Profit & Loss A/C …….
A/C…….Dr Dr
To Profit & Loss A/c To Deferred Tax
Liability A/c
3 It is shown under the 3 It is shown under the head
head of Non- Current of Non- Current Liability
Assets in the balance in the balance sheet.
sheet.

It is important to mention that both the deferred tax

asset and deferred tax liability are created for the temporary
differences only. These differences are temporary in nature and
with the time the impact of these differences gets eliminated.
Deferred tax asset items as well as deferred tax liability items
are a prominent aspect of every company’s financial
statements. This difference in timings of both, gives rise to
certain variance in the company’s accounting. The most
generic forms of deferred tax are Deferred Tax Asset and
Deferred Tax Liability. Deferred tax assets originate when the
amount of tax has either been paid or has been carried forward
but it has still not been acknowledged in the statement of
income. The actual value of the deferred tax asset is generated
by comparing the book income with the taxable income. The
biggest benefit of the deferred tax asset is that it causes the
company’s tax liability to go down tremendously in the future.
The conditions that cause origin of deferred tax asset are as
follows:
 The taxing authority takes the expenses into account
much before time.
 A tax on the revenue earned is levied before time.
 There is a difference in tax rules for asset and
liabilities.
Deferred tax liabilities, on the other hand originate
when a company underpays the amount of taxes due, which it
would eventually pay in the future. It should be remembered,
however, that underpaid does not mean that they have not

fulfilled their tax-duties, it’s just that the taxes would be paid
on a different timescale. It is a tax to be paid in future. In
simple words, deferred tax liabilities are the opposite of
deferred tax asset, which occur when the taxable income is
lesser as compared to the income mentioned in the income
statements of the company.
The conditions that cause origin of deferred tax liability
are as follows:
 In order to showcase great profits to the shareholders,
the companies often push their profits.
 When companies keep more than one copies of the
financial statement, for their own personal use or for
furnishing the same to tax authorities. This is called
dual accounting.
 Sometimes companies also push the current profits into
future, this gives them the opportunity to decrease the
tax amount. By doing this instead of paying the saved
money as taxes, they use that extra money for making
investments.
Deferred Tax Expense” refers to the income tax effect on a
balance sheet arising out of difference taxable income
calculated on the basis of the company’s accounting method
and the accounting income calculated on the basis of tax laws.
Further, it can also be termed as the income tax effect due to
timing differences – temporary or permanent, which is
basically taxes that are deferred. Deferred tax is a method of
accounting for tax on an accruals basis. Deferred tax expense

(income) is the amount of tax expense (income) included in the

determination of profit or loss for the period in respect of
changes in deferred tax assets and deferred tax liabilities
during the period.

MODULE IV
ACCOUNTING FOR REVENUE AND LEASES
IFRS 15/ Ind AS 115

IFRS 15 Revenue from contracts with customers
applies to all contracts with customers except for: leases,
financial instruments and other contractual rights or
obligations within the scope of IFRS 9. A contract with a
customer may be partially within the scope of IFRS 15 and
partially within the scope of another standard. The core
principle of IFRS 15 is that an entity will recognize revenue to
depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods and services.
The core principle is delivered in a five step model framework,
i.e.
a. Identify the contracts with a customer.
b. Identify the performance obligations in the contract.
c. Determine the transaction price.
d. Allocate the transaction price to the performance
obligations in the contract.
e. Recognize the revenue when (or as) the entity satisfies
a performance obligation.
Contracts with customers will be presented in an
entity’s statement of financial position as a contract liability,

contract asset or a receivable depending on the relationship

between the entity’s performance and the customer’s payment.
A contract liability is presented in the statement of financial
position where a customer has paid an amount of consideration
prior to the entity performing by transferring the related good
or service to the customer. Where the entity has performed by
transferring a good or service to the customer and the customer
has not yet paid the related consideration, a contract asset or a
receivable is presented in the statement of financial position,
depending on the nature of the entity’s right to consideration.
A contract asset is recognized when the entity’s right to
consideration is conditional on something other than the
passage of time, for example future performance of the entity.
A receivable is recognized when the entity’s right to
consideration is unconditional except for the passage of time.
IFRS 15 establishes the principles that an entity applies
when reporting information about the nature, amount, timing
and uncertainty of revenue and cash flows from a contract with
a customer. Applying IFRS 15, an entity recognizes revenue to
depict the transfer of promised goods or services to the
customer in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or
services.
To recognize revenue under IFRS 15, an entity applies
the following five steps:
• Identify the contract(s) with a customer.
• Identify the performance obligations in the contract.
Performance obligations are promises in a contract to

transfer to a customer goods or services that are

distinct.
• Determine the transaction price. The transaction price
is the amount of consideration to which an entity
expects to be entitled in exchange for transferring
promised goods or services to a customer. If the
consideration promised in a contract includes a variable
amount, an entity must estimate the amount of
consideration to which it expects to be entitled in
exchange for transferring the promised goods or
services to a customer.
• Allocate the transaction price to each performance
obligation on the basis of the relative stand-alone
selling prices of each distinct good or service promised
in the contract.
• Recognize revenue when a performance obligation is
satisfied by transferring a promised good or service to a
customer (which is when the customer obtains control
of that good or service). A performance obligation may
be satisfied at a point in time (typically for promises to
transfer goods to a customer) or over time (typically for
promises to transfer services to a customer). For a
performance obligation satisfied over time, an entity
would select an appropriate measure of progress to
determine how much revenue should be recognized.
Under Ind AS 115, entities are required to allocate the
transaction price to each performance obligation (or distinct

good or service) in proportion to its stand-alone selling price

i.e. the price at which an entity would sell the promised good
or service separately to a customer.
VARIABLE CONSIDERATION
If a transaction includes a variable amount, an entity
should estimate the amount of consideration to which it will be
entitled in exchange for transferring the promised goods or
services to a customer. Items such as discounts, credits, price
concessions, returns and performance bonuses may result in
variable consideration.
LONG TERM CONTRACTS
In the construction industry, it is very common for a
customer to be required to pay a deposit or portion of the
contract price upfront. There can also be cash receipts from
customers which do not correspond with the timing of the
recognition of revenue. IFRS 15 requires the entity to consider
if this represents a financing arrangement. If a financing
component is significant, IFRS 15 requires an adjustment to be
made for the effect of implicit financing. Similarly, aerospace
and defence industry absorb long term contracts.
REVENUE RECOGNITION FROM CONSTRUCTION
CONTRACTS
IFRS 15 contains specific, and more precise guidance
to be applied in determining whether revenue is recognized
over time (often referred to as ‘percentage of completion’
under existing standards) or at a point in time.

The general principle is that revenue is recognized at a point

in time. However, if any of the criteria in IFRS 15, are met,
revenue should be recognized over time.
If revenue is recognized at a point in time, the overall
principle is that revenue should be recognized at the point in
time at which it transfers control of the good or service to the
customer.
The following indicators should be considered to
determine whether control of an asset or service has been
transferred:
• Does the customer have a present right to payment for the
asset?
• Does the customer have legal title to the asset?
• Has the entity transferred physical possession of the asset
to the customer?
• Does the customer have significant risks and rewards of
ownership of the asset?
• Has the customer accepted the asset?
If revenue is recognized over time, the overall principle is
that revenue is recognized to the extent that each of the vendor’s
performance obligations has been satisfied. IFRS 15 permits
either output or input methods to be used to calculate the
amount of revenue to be recognized. An output method results
in revenue being recognized on the basis of direct measurement
of the value of goods or services transferred to date, while input

methods result in revenue being recognized based on measures

such as resources consumed, costs incurred or machine hours.
It is noted explicitly that when input methods are used, there
may not be a direct relationship between the inputs being
used, and the transfer of goods or services to a
customer. Consequently, any inputs that do not relate
directly to the vendor’s performance in transferring those
goods and services are excluded when measuring progress to
date.
ACCOUNTING FOR LEASES (IAS 17/Ind AS 17)
Leases prescribes the accounting policies and
disclosures applicable to leases, both for lessees and lessors.
Leases are required to be classified as either finance leases
(which transfer substantially all the risks and rewards of
ownership, and give rise to asset and liability recognition by
the lessee and a receivable by the lessor) and operating leases
(which result in expense recognition by the lessee, with the
asset remaining recognized by the lessor).The objective of IAS
17 is to prescribe, for lessees and lessors, the appropriate
accounting policies and disclosures to apply in relation to
finance and operating leases.
IAS 17 applies to all leases other than lease agreements
for minerals, oil, natural gas, and similar regenerative
resources and licensing agreements for films, videos, plays,
manuscripts, patents, copyrights, and similar items.
However, IAS 17 does not apply as the basis of
measurement for the following leased assets:

• property held by lessees that is accounted for as

investment property for which the lessee uses the fair
value model set out in IAS 40
• investment property provided by lessors under
operating leases (IAS 40)
• biological assets held by lessees under finance leases
(IAS 41)
• biological assets provided by lessors under operating
leases (IAS 41)
Classification of leases
A lease is classified as a finance lease if it transfers
substantially all the risks and rewards incident to ownership.
All other leases are classified as operating leases.
Classification is made at the inception of the lease. Whether a
lease is a finance lease or an operating lease depends on the
substance of the transaction rather than the form. Situations
that would normally lead to a lease being classified as a
finance lease include the following:
• the lease transfers ownership of the asset to the lessee
by the end of the lease term
• the lessee has the option to purchase the asset at a price
which is expected to be sufficiently lower than fair
value at the date the option becomes exercisable that, at
the inception of the lease, it is reasonably certain that
the option will be exercised

• the lease term is for the major part of the economic life
of the asset, even if title is not transferred
• at the inception of the lease, the present value of the
minimum lease payments amounts to at least
substantially all of the fair value of the leased asset
• the lease assets are of a specialised nature such that
only the lessee can use them without major
modifications being made
When a lease includes both land and buildings
elements, an entity assesses the classification of each element
as a finance or an operating lease separately. In determining
whether the land element is an operating or a finance lease, an
important consideration is that land normally has an indefinite
economic life. However, separate measurement of the land and
buildings elements is not required if the lessee's interest in both
land and buildings is classified as an investment property in
accordance with IAS 40 and the fair value model is adopted.
Finance lease is often used to buy equipment for the
major part of its useful life. The goods are financed ex GST
and have a balloon at the end of the term. Here, at the end of
the lease term, the lessee will obtain ownership of the
equipment upon a successful 'offer to buy' the equipment.
Traditionally this 'offer' is the balloon amount. On the other
hand, an operating lease agreement to finance equipment for
less than its useful life, and the lessee can return equipment to
the lessor at the end of the lease period without any further
obligation.

The major differences between Operating and Financing

Leases are:
1. Title: In a finance lease agreement, ownership of the
property is transferred to the lessee at the end of the
lease term. But, in operating lease agreement, the
ownership of the property is retained during and after
the lease term by the lessor.
2. Balloon/residual amount: In finance lease agreement,
there is a balloon/residual option for the lessee to
purchase the property or equipment at a specific price.
But, under an operating lease, the lessee does not have
this option.
3. Running costs & administration: Under an operating
lease all running costs (servicing, registration, tyres,
insurance etc) are included in the lease within the
designated term and usage km with one set monthly
repayment amount. Under a finance lease these are
generally not included meaning there can be greater
administration and price fluctuation for the lessee.
4. Account treatment: Operating lease are treated as
expenses (i.e. off balance sheet items) where as a
finance lease is included as an asset for the lessee.
Accounting by lessees
The following principles should be applied in the
financial statements of lessees:
• At commencement of the lease term, finance leases
should be recorded as an asset and a liability at the
lower of the fair value of the asset and the present value
of the minimum lease payments (discounted at the
interest rate implicit in the lease, if practicable, or else
at the entity's incremental borrowing rate).
• Finance lease payments should be apportioned between
the finance charge and the reduction of the outstanding
liability (the finance charge to be allocated so as to
produce a constant periodic rate of interest on the
remaining balance of the liability).
• The depreciation policy for assets held under finance
leases should be consistent with that for owned assets.
If there is no reasonable certainty that the lessee will
obtain ownership at the end of the lease – the asset
should be depreciated over the shorter of the lease term
or the life of the asset.
• For operating leases, the lease payments should be
recognised as an expense in the income statement over
the lease term on a straight-line basis, unless another
systematic basis is more representative of the time
pattern of the user's benefit.
Incentives for the agreement of a new or renewed
operating lease should be recognised by the lessee as a
reduction of the rental expense over the lease term, irrespective
of the incentive's nature or form, or the timing of payments.
Accounting by lessors
The following principles should be applied in the
financial statements of lessors:

• At commencement of the lease term, the lessor should

record a finance lease in the balance sheet as a
receivable, at an amount equal to the net investment in
the lease.
• The lessor should recognise finance income based on a
pattern reflecting a constant periodic rate of return on
the lessor's net investment outstanding in respect of the
finance lease.
• Assets held for operating leases should be presented in
the balance sheet of the lessor according to the nature
of the asset. Lease income should be recognised over
the lease term on a straight-line basis, unless another
systematic basis is more representative of the time
pattern in which use benefit is derived from the leased
asset is diminished.
Incentives for the agreement of a new or renewed
operating lease should be recognised by the lessor as a
reduction of the rental income over the lease term, irrespective
of the incentive's nature or form, or the timing of payments.
Initial direct and incremental costs incurred by lessors in
negotiating leases must be recognised over the lease term.
They may no longer be charged to expense when incurred.
This treatment does not apply to manufacturer or dealer lessors
where such cost recognition is as an expense when the selling
profit is recognised.
NEW STANDARD ON LEASE (IFRS 16/ Ind AS 116)
Leasing is an important and widely used financing
solution. It enables companies to access and use property and
equipment without incurring large cash outflows at the start. It

also provides flexibility and enables lessees to address the
issue of obsolescence and residual value risk. In fact
sometimes, leasing is the only way to obtain the use of a
physical asset that is not available for purchase.
Under existing rules, lessees account for lease
transactions either as operating or as finance leases, depending
on complex rules and tests which, in practice, use ‘bright-lines’
resulting in all or nothing being recognized on balance sheet
for sometimes economically similar lease transactions.The
impact on a lessee’s financial reporting, asset financing, IT,
systems, processes and controls is expected to be substantial.
Many companies lease a vast number of big-ticket items,
including cars, offices, power plants, retail stores, cell towers
and aircraft.
MAJOR CHANGES IN THE LEASE ACCOUNTING
 The distinction between operating and finance leases is
eliminated for lessees, and a new lease asset (representing
the right to use the leased item for the lease term) and lease
liability (representing the obligation to pay rentals) are
recognised for all leases.
 Lessees should initially recognise a right-of-use asset and
lease liability based on the discounted payments required
under the lease, taking into account the lease term as
determined under the new standard. Determining the lease
term will require judgment which was often not needed
before for an operating lease as this did not change the

expense recognition. Initial direct costs and restoration

costs are also included.
 Lessor accounting does not change and lessors continue to
reflect the underlying asset subject to the lease arrangement
on the balance sheet for leases classified as operating. For
financing arrangements or sales, the balance sheet reflects
a lease receivable and the lessor’s residual interest, if any.
 The key elements of the new standard and the effect on
financial statements are as follows:
o A ‘right-of-use’ model replaces the ‘risks and rewards’
model. Lessees are required to recognise an asset and
liability at the inception of a lease. All lease liabilities
are to be measured with reference to an estimate of the
lease term, which includes optional lease periods when
an entity is reasonably certain to exercise an option to
extend (or not to terminate) a lease.
o Contingent rentals or variable lease payments will need
to be included in the measurement of lease assets and
liabilities when these depend on an index or a rate or
where in substance they are fixed payments. A lessee
should reassess variable lease payments that depend on
an index or a rate when the lessee remeasures the lease
liability for other reasons (for example, because of a
reassessment of the lease term) and when there is a
change in the cash flows resulting from a change in the
reference index or rate (that is, when an adjustment to
the lease payments takes effect). • Lessees should

reassess the lease term only upon the occurrence of a

significant event or a significant change in
circumstances that are within the control of the lessee.
The new standard will gross up balance sheets and
change income statement and cash flow presentation. Rent
expense will be replaced by depreciation and interest expense
in the income statement (similar to finance leases today). This
results in a front-loaded lease expense, which for some might
decrease earnings and equity immediately after entering into a
lease compared to an operating lease today.

MODULE V:
MODERN CONCEPTS IN ACCOUNTING
HUMAN RESOURCE ACCOUNTING

Human resources are considered as important assets
and are different from the physical assets. Physical assets do
not have feelings and emotions, whereas human assets are
subjected to various types of feelings and emotions. In the
same way, unlike physical assets human assets never gets
depreciated. Therefore, the valuations of human resources
along with other assets are also required in order to find out the
total cost of an organization. In 1960s, RensisLikert along with
other social researchers made an attempt to define the concept
of human resource accounting (HRA).
Flamhoitz defines HRA as ‘accounting for people as an
organizational resource. It involves measuring the costs
incurred by organizations to recruit, select, hire, train, and
develop human assets. It also involves measuring the economic
value of people to the organization’.
According to Stephen Knauf, ‘ HRA is the
measurement and quantification of human organizational
inputs such as recruiting, training, experience and
commitment’.
Since the beginning of globalization of business and
services, the human resources are becoming more important
and decisional input for the success of any corporate
enterprise. Human resource accounting (HRA) involves

accounting for expenditures related to human resources as

assets. All the processes of the organisation are operated by
human resources, thereby the changes in the HR cost and
benefits must be considered. Though it has been accepted that
HR is capital resource thereby the valuation of this resource is
very necessary and information about the valuation should be
given to the investors, the management and others through
financial statements. Human resources accounting is basically
an information system that tells management what changes are
occurring over time to the human resources of the business.
Human resources accounting (HRA) is one of the latest
concept adopted by few corporations in our country. Most of
the corporations have realised that human resources are their
most precious resources. So it is required that some measures
to develop their human resources but also taken measures to
accelerate their values.
Human Resources are invaluable asset in an
organization. It is a live asset of any business concern but their
value cannot be measured accurately. The value of manpower,
present and potential, to the management is conceptually well
established. From a macroeconomic view point, the services
which people can potentially provide constitute a form of
capital. Recently Indian Corporate Sector has shown growing
interest in the accounting for human resources.The concept of
human resource accounting has been defined by the committee
on Human Resource Accounting of the American Accounting
Association as “the process of identifying and measuring data

about human resources and communication this information to

interested parties.”
Need for HRA
The need for human asset valuation arose as a result of
growing concern for human relations management in the
industry.
Objectives of HRA
RensisLikert described the following objectives of
HRA:
1. Providing cost value information about acquiring,
developing, allocating and maintaining human resources.
2. Enabling management to monitor the use of human
resources.
3. Finding depreciation or appreciation among human
resources.
4. Assisting in developing effective management practices.
5. Increasing managerial awareness of the value of human
resources.
6. For better human resource planning.
7. For better decisions about people, based on improved
information system.
8. Assisting in effective utilization of manpower.
Methods of Valuation of Human Resources
There are certain methods advocated for valuation of
human resources. These methods include historical method,

replacement cost method, present value method, opportunity

cost method and standard cost method. All methods have
certain benefits as well as limitations.
Benefits of HRA
1. The system of HRA discloses the value of human
resources, which helps in proper interpretation of return
on capital employed.
2. Managerial decision-making can be improved with the
help of HRA.
3. The implementation of human resource accounting clearly
identifies human resources as valuable assets, which helps
in preventing misuse of human resources by the superiors
as well as the management.
4. It helps in efficient utilization of human resources and
understanding the evil effects of labour unrest on the
quality of human resources.
5. This system can increase productivity because the human
talent, devotion, and skills are considered valuable assets,
which can boost the morale of the employees.
6. It can assist the management for implementing best
methods of wages and salary administration.
Limitations of HRA
1. The valuation methods have certain disadvantages as well
as advantages; therefore, there is always a bone of
contention among the firms that which method is an ideal
one.

2. There are no standardized procedures developed so far. So,

firms are providing only as additional information.
All the processes of the organisation are operated by
human resources, thereby the changes in the HR cost and
benefits must be considered. Though it has been accepted that
HR is capital resource thereby the valuation of this resource is
very necessary and information about the valuation should be
given to the investors, the management and others through
financial statements. Human resources accounting is basically
an information system that tells management what changes are
occurring over time to the human resources of the business.
The basic objectives of human resource accounting are as
under:
(1) HRA facilitates managing the people as one of the
resources of the organization.
(2) To help the management for making decision about
acquiring, allocating, developing and maintaining human
resources in order to keep control on human resource cost
as one of the organizational objective.
(3) To provide information to the management regarding
human resource cost and value.
(4) To see whether the human resources are effectively
utilized or not
(5) To see whether the human resources are producing a
return on investment of the persons interested in the
organization or not.

(6) Provide human resources accounting detail to outsiders

like financers such as bankers, financial institutions and
creditors etc.
Methods of Accounting Valuation of Human Resources:
The different approaches invariably denotes the
methods or techniques for evaluation of the human resources.
In order to measure the value of HR, there are few decisional
aspects to be considered, are as given here:
i. Performance evaluation part for human resources;
ii. Present value of salary/wages payments;
iii. Real capital cost;
iv. Matching the cost of HR with the revenue of organisation.
Generally the methods for HR Accounting with its
valuation are:
1. Historical Cost Approach:
This approach was developed by William C. Pyle,
which is based on the concept that there are certain cost
incurred by the organisation with regard to human resources.
Cost is a sacrifice aspect incurred to obtain some anticipated
benefits or services. In this approach the actual cost incurred
on recruiting, selecting, hiring, training and development of
human resources, of the organisation is maintained and a
proportion of it is written off to the income of the next and
expected useful life of human resources.The approach of the
cost of human resources is very similar to the book value of
the other physical assets. This method is simple to understand

and easy to work out. It is based on traditional accounting

concept of matching cost with revenue.
2. Replacement Cost Approach:
This approach was first opined by RensisLikert and
was developed by Eric G. Flamholthz. Human resource of an
organisation are to be values on the assumption that a new
similar organisation has to be created from cut down and what
would be the cost to the firm if the existing resources were
required to be replaced with other persons of equivalent talents
and experience. According to this model the value of employee
is estimated as the cost of replacement with a new employee of
equivalent ability and efficiency. There are two costs,
individual replacement cost and positional replacement cost.
The cost of recruiting, selecting, training and development and
familiarisation cost are account in individual replacement cost.
When an employee change the present position to
another or leave the organisation then the cost of moving,
vacancy, carrying and other relevant costs reflect in individual
replacement cost. Positional replacement cost refers to the cost
of filling different position in an organisation.
3. Opportunity Cost Approach:
This approach analyse the alternative earning sources
from the productive capacity of human resources by putting
some alternative use. Opportunity cost is the value of an asset
(HR) when there is an alternative use of it. The perspective
chances of opportunity cost are declined for those employees
that are not scarce. But the alternative use of HR within the

organisation is restricted and at the same moment, the use of

HR with finding out their alternative cost may not be
incorporated properly.
4. Standard Cost Approach:
This approach is based on the line and staff as well as
functional relationship of employees in an organisation. The
employees of an organisation are categorized and divided into
different groups with hierarchical levels or positions. Standard
cost is fixed for each category of employees and their
worthwhile role may be calculated. Due to some of the static
position of employees on account of their status and position, it
does not take any differences of them put in the same group.
Human resources accounting (HRA) is one of the latest
concept adopted by few corporations in our country. Most of
the corporations have realised that human resources are their
most precious resources. So it is required to taken some
measures to develop their human resources but also taken
measures to accelerate their values.
FORENSIC ACCOUNTING
Forensic accounting is the assistance of finance
professionals to settle disputes concerning allegations,
fraudulence, suspicion of fraud and misconduct in business.
What does Forensic Accounting cover?
The two major aspects within forensic accounting
practices are:
1. Litigation support services. A forensic accounting expert

measures the damages experienced by the parties implicated in

legal disputes and can aid in settling conflicts, even before it
reaches the courtroom. In the event that a conflict reaches the
courtroom, the forensic accounting professional could give
evidence as an expert witness.
2. Investigative/fact-finding services. A forensic accountant
must determine whether illegal matters such as employee
felony, securities embezzlement (including tampering and
distortion of financial accounts), identity theft and insurance
racket have taken place.
Relevance of forensic accounting in an organisation
• Assessing working transactions for compliance with basic
operating processes and agreement.
• Performing thorough scrutiny and examination of financial
payment dealings in the accounting system to decide if they
are standard or beyond company policy.
• Assessing standard ledger and financial reporting system
transactions for likely unlawful tampering or falsification of
information or accounts and its consequences on the ensuing
financial accounts.
•Analysing warranty requests or returns for practices of
fraudulence or misuse.
• Assisting in estimating the economic damages and the
ensuing insurance demands that arise from catastrophes such
as fires or other natural setbacks.
• Assessing or affirming business rating in consolidations and
accomplishments.

Forensic accounting is the investigation of fraud or

financial manipulation Top Accounting Scandals. The last two
decades saw some of the worst accounting scandals in history.
Billions of dollars were lost as a result of these financial
disasters. Many of these scandals were a result of the excessive
greed of the by performing extremely detailed research and
analysis of financial information.
SOCIAL RESPONSIBILITY ACCOUNTING
Business is a socio-economic activity and it draws its
inputs from the society, hence its objective should be the
welfare of the society. It should owe a responsibility towards
solving many of the social problems. In the present age of
growing technological, economic, cultural and social
awareness, the accounting has not only to fulfill its
stewardship function for the owners of the enterprise, but also
accomplish its social function. Changing environments and
social parameters have compelled business enterprises to
account and report information with regard to discharge of
their social responsibilities. The boundaries of the principles,
practices and skills of conventional accounting have been
extended to such areas for social disclosure and attestation
with regard to the measures of social programmes.
The concept of ‘Social Accounting’ has gained
importance as a result of high level industrialization which has
brought prosperity as well as many problems to the society. It
has necessitated the corporate sector, with huge amounts of
funds at their disposal, to invest substantial amounts in social
activities so as to nullify the adverse effects of

industrialization. “In modern times, accounting efforts have

been extended to the assessment of the state of society and of
the social programmes not for the satisfaction of any individual
or group but for the application of evaluative procedures in the
allocation of resources towards better social well-being as a
whole.” Social accounting is concerned with the study and
analysis of accounting practice of those activities of an
organisation. The concept of socialistic pattern of society, civil
rights movements, environmental protection and ecological
conservation groups, increasing awareness of society towards
corporate social contribution, etc. Have contributed towards
the growing importance of Social accounting. Social
Accounting, also known as Social Responsibility Accounting,
Socio-Economic Accounting, Social Reporting and Social
Audit, aims to measure and inform the general public about the
social welfare activities undertaken by the enterprise and their
effects on the society
Features of Social Accounting:
(i) Social accounting is an expression of a company’s social
responsibilities.
(ii) Social accounting is related to the use of social resources.
(iii) Social accounting emphasize on relationship between
firm and society.
(iv) Social accounting determines desirability of the firm in
society.
(v) Social accounting is application of accounting on social
sciences.

(vi) Social accounting emphasizes on social costs as well as

social benefits.
Need/Benefits of Social Accounting:
(1) A firm fulfills its social obligations and informs its
members, the government and the general public to
enables everybody to form correct opinion.
(2) It counters the adverse publicity or criticism leveled by
hostile media and voluntary social organizations.
(3) It assists management in formulating appropriate policies
and programmes.
(4) Through social accounting the firm proves that it is not
socially unethical in view of moral cultures and
environmental degradation.
(5) It acts as an evidence of social commitment.
(6) It improves employee motivation.
(7) Social accounting is necessary from the view point of
public interest groups, social organisations investors and
government.
(8) It improves the image of the organization.
(9) Through social accounting, the management gets
feedback on its policies aimed at the welfare of the
society.
(10) It helps in marketing through greater customer support.
(11) It improves the confidence of shareholders of the firm.

ENVIRONMENTAL ACCOUNTING
Environmental accounting, also called green
accounting, refers to modification of the System of National
Accounts to incorporate the use or depletion of natural
resources. Environmental accounting is a vital tool to assist in
the management of environmental and operational costs of
natural resources. Environmental accounting principles and
practices are mainly used by organizations to more accurately
trace environmental costs back to specific activities.
Government agencies, private businesses, local communities
and individuals all take responsibility for conserving natural
resources and operating sustainably in most developed nations.
Governmental agencies and businesses are accountable to the
public for setting environmentally related efficiency goals that
lead to cost reductions and improved operational processes.
These organizations are more likely to implement methods
from environmental accounting which is a growing subset of
traditional accounting. While environmental accounting can
focus on environmental management accounting or financial
accounting, the most prominent benefits come from the
application of environmental management accounting
methods. This type of accounting focuses on gathering,
estimating and analyzing costs associated with the use of
energy and physical materials like timber, metal or coal.
Standard accounting practices tended to place these costs in the
catch all category of overhead, but environmental management
accounting allows accountants to apply activity based cost
principles to more accurately associate these costs to various

projects or events. Decision makers who can see exactly where

these natural resources are used across various projects can
locate areas of synergy that allow them to reduce the amount
of wasted materials at the program or enterprise level.
Businesses use three generally accepted methods to
implement environment accounting: financial accounting,
managerial accounting and national income accounting.
Financial accounting is the process of preparing financial
reports, such as earning statements, for presentation to
investors, lenders, governing bodies and other members of the
public. In this instance, environmental accounting estimates
are presented as part of the financial accounting reports.
INVESTMENT ACCOUNTING
The accounting for investments occurs when funds are
paid for an investment instrument. If the investor intends to
hold an investment to its maturity date (which effectively
limits this accounting method to debt instruments) and has the
ability to do so, the investment is classified as held to maturity.
Investment means to spend money outside the business in
order to earn some income which are non-trading in nature.
Usually, money is invested in Government Bonds, Securities,
Shares and Debentures of companies etc.
PROACTIVE ACCOUNTING
Proactive accounting manages business finances
effectively, make the right decisions and maximise your
profits. Most businesses do reactive accounting, i.e. they
produce a set of accounts and financial records only when they

are legally required to do so. It is important to go deeper into

the accounts so as to identify trends and boost profits while
avoiding losses. Proactive accounting allows to stay on top of
business finances and the take decisions quickly. It allows to
identify where money is leaking out of your business. It
allows you to see who has been paid, how much and when as
well as who has paid, how much and when.
INFLATION ACCOUNTING
Inflation accounting refers to the process of adjusting
the financial statements of a company to show the real
financial position of the company during the inflationary
period. Inflation accounting is a special technique used to
factor in the impact soaring or plummeting costs of goods in
some regions of the world have on the reported figures of
international companies. Financial statements are adjusted
according to price indexes, rather than relying solely on a cost
accounting basis, to paint a clearer picture of a firm’s financial
position in inflationary environments. This method is also
sometimes referred to as price level accounting. When a
company operates in a country where there is a significant
amount of price inflation or deflation, historical information on
financial statements is no longer relevant. To counter this
issue, in certain cases companies are permitted to use inflation-
adjusted figures, restating numbers to reflect current economic
values.
Techniques of Inflation Accounting:
1. Current Purchasing Power Method: It involves adjustment

of financial accounts to price changes. A general price

index is used to convert the values of various items. It
takes into account the purchasing power of money and
ignores the rise and fall in the price of an item.
Conversion factor = Price Index at time of conversion/
Price Index at the date of conversion
CPP Value = Conversion Amount or Historical Value x
Conversion Factor
2. Current Cost Accounting: Under this method assets are
shown at current costs and profits are determined on the
basis of costs at the date of sale rather than the actual cost.
3. Current Value: Under this method all assets and liabilities
are measured at current value at which they could be sold
or settled at the current price.
4. Replacement Cost Accounting: Under this method all
assets and liabilities are recorded on a balance sheet
according to the cost of replacing them rather than heir
historical costs

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MCM2C06 : ADVANCED CORPORATE ACCOUNTING

Group financial statements are financial statements

School of Distance Education, University of Calicut 1

group’s basic shape. The structure is the underlying pattern of

School of Distance Education, University of Calicut 2

the same and explains the accounting requirements for

statements of the subsidiary are used, adjusted for the effects

School of Distance Education, University of Calicut 4

Selection of method for measuring non-controlling

School of Distance Education, University of Calicut 5

can together run independently as a going concern (i.e. it

School of Distance Education, University of Calicut 6

(iii) in a business combination achieved in stages, the

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• Recognizes and measures the identifiable assets

School of Distance Education, University of Calicut 8

Statements. Intra-group transactions are not with third parties

School of Distance Education, University of Calicut 9

economic entity, and do not reflect the effects of transactions

School of Distance Education, University of Calicut 10

ADJUSTMENT OF UNREALISED PROFIT

School of Distance Education, University of Calicut 11

School of Distance Education, University of Calicut 12

year but no notification of this fact has been made in the

School of Distance Education, University of Calicut 13

 If the dividend of the subsidiary firm have been

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the P/L Account of the Holding company to the cost of

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be ignored. If however, shares have been acquired in

School of Distance Education, University of Calicut 16

Restructuring is the corporate management term for the

School of Distance Education, University of Calicut 17

issuance of stock for stock. In contrast to a merger, in an

School of Distance Education, University of Calicut 18

over the assets and liabilities of the old company. This

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about to be realized as part of the process of liquidating the

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The Statement of Affair is a summary of Company’s assets

creditor, or contributory of the company, on payment of a

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to the liquidator any surplus after meeting their claims. Only

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The various claims have priority in the order mentioned

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debenture-holders may have the power under the Debenture

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Rs.300 Cr. 600 1,000

Capital Commitments: Rs.700 Crores

School of Distance Education, University of Calicut 26

a) Two companies, Sunrise Ltd. And Khajana Ltd. Are to

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Assume that the above scheme was duly approved by the

1 Khajana Ltd. A/c 200

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Transactions with Sunrise Ltd.

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2 Equity shares of Sunrise Ltd. 10

School of Distance Education, University of Calicut 30

School of Distance Education, University of Calicut 31

School of Distance Education, University of Calicut 32

Provision for depreciation:

Investment in Equity Instruments